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Bond markets since Brexit

04/08/2016

How have investors reacted since the bond market volatility caused by the recent Brexit vote? Whilst yields on both gilts and European government debt have hit new record lows as a result of high demand for safe assets, corporate bonds saw initial short-term weakness followed by a strong rebound in the last few weeks.

Credit risk premia were pushed wider by heightened risk aversion immediately after the vote, but this effect was less extreme and shorter-lived than in the first two months of the year, when risk aversion peaked due to macro-economic concerns.

Market direction is now being guided by the near-term impact of central banks’ monetary policy activities. In Sterling, this centres on expectations of a Bank of England interest rate cut and, potentially, the launch of further asset purchases to ease monetary policy. In the Euro market, the focus remains on the European Central Bank’s purchases of investment grade corporate bonds.

Will the referendum have a short lifecycle impact or will there be further bouts of volatility over a protracted period of time? The answer to this is not yet clear; however, financial markets are well accustomed to volatility, whether economically or politically driven. The current climate presents an excellent opportunity for institutional investors with the patience to withstand short-term volatility to find attractive value on a bond by bond basis.

The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested.

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